Daniel Green, a currency strategist at JP Morgan Asset Management in London, recently made the case for a tactical short-term long position in the euro versus the Australian dollar. [See The euro taboo].
Cracks in the Australian dollar may just be starting to form, says Daniel Green, currency strategist at JP Morgan.
“You could be forgiven for thinking the greatest taboo in foreign exchange is to dare suggest being long euros. Much airtime is given to expressing a dim view on the future of the single currency, and one would be hard pressed to find an investor who isn’t structurally short the euro in some form. However, this begs the very simple question: is there potential for a short-term correction?”
Every currency trade is made relative to a second currency, and with so much uncertainty surrounding the outcome of the next meeting of the Federal Open Market Committee, the US Federal Reserve’s interest-rate committee, on 13 September, Green poses the question as to whether investors should be looking further afield than just the US dollar in order to establish a long euro view?
A longer-term chart of the Australian dollar versus the euro (see below), shows that the Australian dollar has strengthened considerably over the past three and a half years. According to Green this appreciation belies concerns about the sustainability of growth of the Chinese economy (Australia’s largest trading partner), the falling price of commodities (Australia’s biggest export) and domestic issues within the Australian economy (government budget deficit).
Green puts the Aussie dollar’s appreciation down to investors’ search for safe havens and income: “The appetite for yield has continued to drive interest in the Australian dollar and this is underpinned by the AAA-sovereign rating of the nation’s bonds. A rare sight in developed markets these days!”
However, cracks in the Australia dollar may just be starting to form, as perhaps the very recent weakness is a portent. Green says: “The nation’s central bank has in the past stood out from its G-10 peers with its laissez-faire attitude to the strength of the Australian dollar. This is now beginning to change. Falling terms of trade and the increasingly weaker global outlook are not resulting in a falling Australian dollar as they would have expected. Recent comments from the central bank suggest an increased degree of unease at this development.”
JPMorgan’s recent proprietary positioning survey showed a large broad market short in the euro. While the situation in Europe is uncertain, the market’s over-stretched short position and widespread bearish sentiment means the stage could be set for a “classic short-term squeeze”, says Green, who favours being long the euro versus Australian dollar for a short-term bounce.
One potential way to play this is via the ETFS Short AUD Long EUR ETC (XNJK) issued by ETF Securities. This ETC tracks the MSFX Short Australian Dollar/Euro Total Return Index, an index which provides short exposure to movements in exchange rates between the local currency AUD and EUR and to local interest rates based on those implied in forward contract prices. The index also provides a daily collateral yield, which replicates the performance of a fully collateralised position in currency forward contracts which are rolled on a daily basis.
The ETC is fully collateralised and UCITS compliant, and although it is solely listed on Germany’s Deutsche Börse, it is registered for sale across a host of other European countries including France, Italy, Netherlands, Spain, Sweden, and the United Kingdom. Importantly for UK investors, the ETC is eligible for ISAs and SIPPs and has UK Fund Reporting Status.
For those unfamiliar with this type of product, an ETC trades on a regulated stock exchange like a share, and prices and tracks similarly to an exchange-traded fund (ETF). This ETC is also supported by multiple market makers that can create/redeem daily on demand.
ETFS Short AUD Long EUR ETC (XNJK) has a management fee of 0.39% pa.